1. What is the Reducing Balance Method?

The reducing balance method (also called amortized loan) calculates interest based on the remaining principal amount. Each payment reduces the principal, so interest decreases over time while more of each payment goes toward principal.

2. How Does the Calculator Work?

The calculator uses the reducing balance formula:

Where:

• \( P \) — Principal loan amount ($)
• \( r \) — Monthly interest rate (annual rate ÷ 12)
• \( n \) — Total number of payments (term in years × 12)
• \( PMT \) — Monthly payment amount

Explanation: This formula accounts for the compounding effect of interest while ensuring the loan is fully paid off by the end of the term.

3. Importance of Loan Calculation

Details: Understanding your exact monthly payment helps with budgeting and comparing different loan options. The reducing balance method is the most common for mortgages, car loans, and personal loans.

4. Using the Calculator

Tips: Enter the principal amount in dollars, annual interest rate as a percentage (e.g., 5.25), and loan term in years. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: How does this differ from flat interest rate?
A: Flat rate calculates interest on the original principal for the entire term, while reducing balance calculates on the remaining balance each period.

Q2: Can I see an amortization schedule?
A: This calculator shows the summary. For a detailed payment-by-payment breakdown, use an amortization calculator.

Q3: Does this include taxes and insurance?
A: No, this calculates only principal and interest. Actual mortgage payments often include escrow for taxes and insurance.

Q4: How does extra payment affect the loan?
A: Extra payments reduce principal faster, decreasing total interest and potentially shortening the loan term.

Q5: What's the difference between APR and interest rate?
A: APR includes fees and other loan costs, while interest rate is just the periodic charge for borrowing.